Another look at market underperformers of 2013

Lost in last year's financial headlines of the Standard & Poor's 500 stock index's 30 percent rise were the market sectors that lost money, such as emerging markets and precious metals.

By Debbie Carlson

Lost in last year's financial headlines of the Standard & Poor's 500 stock index's 30 percent rise were the market sectors that lost money, such as emerging markets and precious metals.

Two of the biggest emerging market exchange-traded funds by assets under management, the Vanguard FTSE Emerging Markets ETF and the iShares MSCI Emerging Markets ETF, lost 4.9 percent and 3.7 percent, respectively. Several commodity markets also ended 2013 lower, with gold's 27 percent drop most notable.

And some sectors made money but returned significantly less than the main index, which may have disappointed investors.

So with the basic investment rule of "buy low, sell high," are 2013's losers, or at least the underperformers, worth considering for 2014's portfolio? In some cases, yes, but in others, financial market watchers advise to wait.

Six out of the 10 domestic market sectors underperformed the S&P 500, said Pat O'Hare, chief market analyst at market research firm Briefing.com: technology, energy, consumer staples, basic materials, utilities and telecom. Underperformance doesn't mean these sectors lost money; rather, they didn't meet or beat the index, he said.

"Utilities saw a 9 percent gain in 2013. A 9 percent gain in any other year, people would be fine with, but last year was last year, so it qualified as a gross underperformance," he said.

The utilities sector's relatively weak performance makes it attractive to investors, particularly at this time of the year, when seasonal factors work in the sector's favor, said John Person, president of National Futures, an investment advisory service.

"Buying utilities is a defensive move; but it's also seasonal. You use more electricity (in the winter). ... In utilities, I like Exelon Corp., plus it has a 6 percent yield," he said.

Be choosy in technology. Although the S&P technology sector rose about 24 percent in 2013, O'Hare said much of that gain came from biotechnology firms and a few "high momentum" names, so there are some values to be found.

Person said he likes technology firms that support the Internet, such as Netgear. "No matter where you go, everyone has free Wi-Fi or are starting to offer it," he said.

Person and Fran Radano, senior investment manager at Aberdeen Asset Management, said electronic storage companies have potential. Radano said his pick is EMC Corp., which also owns VMware, a virtual server company.

The firm was "under attack as companies weren't spending as much on storage, but (EMC is) still front and center, and a leader in the space, so I think you'll see a natural rebound there," he said.

Emerging markets were beat up last year after the Federal Reserve announced it would taper its asset-purchase program, known as quantitative easing. These countries saw gains when the Fed initiated the program, so now that the Fed is pulling in its stimulus, the opposite is occurring. Concerns about growth in China, and country-specific problems in places like Turkey and Argentina, continue to hit the stock market and currencies of those countries.

There is value to be had in emerging markets, but Person, O'Hare and Radano all urged caution.

"Emerging markets are not going out of business ... but we certainly wouldn't be rushing in to buy the recent weakness," O'Hare said. "But (long-term investors can) start scaling in modestly if you have that patient attitude necessary for these markets."

Again, investors need to be choosy, Radano said. "It's not one big brush stroke of pain. I think we've seen pockets of strength, (such as) Mexico, our closet neighbor. Things are getting better there on the margin," he said.

Some commodity markets may improve. Commodity markets had a tough year. Gold prices fell sharply, as did values for several agricultural commodities, including corn, coffee and sugar. Livestock prices bucked the trend and rose smartly as 2012's drought caused ranchers to slaughter animals early to reduce feed costs, meaning fewer current supplies.